Cold weather offers hot investment plays

Natural-gas prices spike up, but experts warn that opportunity is only short-term

The surge in natural-gas prices has opened up investment opportunities, but only short-term plays on volatility, because the spike isn't likely to last.

The recent bout of severely cold weather across the United States has driven the price of gas to more than $5 per million British thermal units on Thursday, from about $4.32 per million earlier this month, according to the U.S. Energy Information Administration.

Investors interested in riding this wave can access a number of exchange-traded products offering direct exposure to natural-gas futures, such as the iPath Exchange Traded Notes DJ UBS Nt Gas TRSI A (GAZ), which largely tracks the short-term futures contracts that shot up most dramatically in recent weeks, or the United States Natural Gas Fund (UNG), which is designed to emulate the fluctuations of natural-gas prices.

According to Barry Fennell, a senior research analyst at Thomson Reuters Corp., through Monday, GAZ had gained 12.11% since the beginning of the year, and UNG was up 11.98% over that period.

There is plenty of room to use these exchange-traded products for short-term plays against consensus predictions, he said.

April natural-gas futures are trading about $1 below the March contracts, indicating that investors expect the cold weather to exit rather quickly, Mr. Fennell said.

“You could go against this consensus and bet that the prices of these contracts would go up,” he said.

Still, there is plenty of volatility in futures for investors willing to take on this kind of risk.

For example, March futures spiked 11% on Wednesday after plunging 6.5% two days earlier on news of warmer weather, according to Bloomberg.

The rationale for holding these ETPs for the long run isn't as strong, said Stewart Glickman, group head of energy and materials at S&P Capital IQ.

“We are looking at natural-gas prices by the end of 2014 to drop back down to around $3.59 per million BTU,” he said.

Natural-gas supplies likely will remain robust this year, he said.

Investors fretting about dwindling inventories of gas are forgetting that during the past five years, inventories have been unusually high due to the boom in domestically produced natural gas.

“You typically think about natural-gas inventories in terms of the five-year average, but here we must keep an even longer period in mind,” Mr. Glickman said. “And by that standard, inventories really aren't that low.”

If anything, there will be a tendency to overproduce natural gas in the coming year, he said.

Energy companies have shifted production away from gas toward oil in recent years as natural-gas prices have plummeted. But since a significant amount of natural gas is produced as a byproduct of oil drilling, supplies tend to be higher than anticipated.

Nonetheless, there are a couple of upcoming political events that could shake up the natural-gas market in the near future, Mr. Fennell said.

The most significant is the looming U.S. debt ceiling negotiation next month.

“There's an intermediate- to long-shot chance that Republicans could barter a green light for the Keystone pipeline in exchange for an increase in the debt ceiling,” he said.

To the extent that the pipeline, which would connect gas fields in Canada to the United States, increased domestic supplies of gas, futures prices could drop.

The opposite could happen if the pipeline is rebuffed, Mr. Fennell said.

There is also a chance that the November gubernatorial election in New York could lead to an opening up of the state to natural-gas drilling, he said.

“If [energy companies] were to tap into that, which is so centrally located near large populations, it could have a long-term effect on prices of natural gas,” Mr. Fennell said.